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Cost Accounting

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Process Costing

In business where a product passes through different stages of production, each distinct and well defined, process costing is employed. A separate account for each process is opened and all expenditure pertaining to a process is charged to that process account. Thus, the cost of the product at each stage of manufacture is found out. The partially worked product of a process may either be transferred to a Process Stock Account from where it will be sent to the next process as and when required or may be sent directly to the next process. Thus, in process costing the finished products of a preceding process becomes the raw material of the next process.

The system of process costing is suitable for industries involving continuous production of the same product or products through the same process or set of processes. It is in use in plant producing paper, rubber products, medicines, chemical products. It is also very much common in flour mill, bottling companies, canning plants, breweries etc.

General principles

Following general principles are followed for cost determination under Process Costing:

(a) The production activities of the factory are classified by processes or departments. Each process or department includes a number of operations, none of which is separately measurable and each of which completes a distinct stage in the manufacture of the product.

(b) All direct and indirect costs of a particular period are classified by processes. Each process account is debited with the amount of direct material and labour and with a proportionate part of overhead expenses.

(c) Production in terms of physical quantities is recorded in respective process accounts.

(d) The total cost of each process is divided by the total production of the process and average cost per unit for the period is obtained.

(e) In case certain products remain in process at the end of a period, their stage of completion is estimated and inventory is computed in terms of completed products. For example, if 20 units are in process and it is estimated that they are complete only to extent of 25% completed products will be taken as 5 units only.

(f) When products are processed in more than one department, costs of one department are transferred to the next department as initial costs. The total cost and cost per unit is thus determined by cumulating costs of different departments.

(g) In case of loss or spoilage of units in a department, the loss is borne by the units produced in that department. Thus, the average cost per unit is increased.